Category Archives: Economics of Health Care

Longer term health insurance policies

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Hanming Fang and others write,

Under long-term contracts, sick individuals pay relatively low premiums and compensate by paying relatively high premiums in healthy times of their life. In theory, a carefully designed long-term contract can reduce the risk of premium fluctuations due to health shocks (“reclassification risk”), while ensuring participation and eliminating adverse selection

This was the health insurance solution that I advocated in Crisis of Abundance in 2006. The authors look at an version that is used by about 10 percent of the insured population in Germany.

The main contribution of our paper is to provide a systematic welfare analysis of an existing, simple real-world alternative long-term contract with a distinct advantage of low information requirements for implementation. We show that, even though the GLTHI [German long-term health insurance] contracts are theoretically not optimal, they provide a close approximation in terms of welfare to the optimal GHHW contracts by providing better reclassification risk insurance at the cost of less intertemporal consumption smoothing

Price discrimination explains pharmaceutical prices?

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Note: before the virus crisis dominated the news, I had composed and scheduled a lot of posts. There are still a few left to run. This is one of them.

Pragya Kakani, Michael Chernew, and Amitabh Chandra write,

Annual inflation of list prices was 12% while that of net prices was 3%, implying that financial rewards to manufacturers per unit sold have not grown proportionally to list prices. This pattern is mirrored in 19 of the 20 top drug classes by revenue including insulins, where list and net price inflation were 16% and 2% annually respectively. Finally, we find price growth explains 76% of revenue growth when measured by list prices but 31% of revenue growth when measured by net prices. Moreover, new product entry is the most important factor affecting pharmaceutical revenue growth. These findings provide a cautionary note on using list prices for policy analysis.

Of course, we already knew about price discrimination in the form of lower prices charged in foreign countries with price controls. If demand is more elastic in foreign countries, then that sort of price discrimination might be efficiency-enhancing.

Re-framing David Cutler’s proposal

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David Cutler writes,

Administrative costs in the health-care system are a classic public good. Payers and providers may together agree that standardizing billing codes and quality reporting would be valuable, but no single actor has an incentive to pay for standardization when others will benefit as well. For example, if insurer A chooses to harmonize its policies with insurer B, that lowers administrative costs across the board and thus fees that all insurers collectively need to pay. However, insurer A will not take these cost savings to other insurers into account. As a result, insurer A will be discouraged from investing in harmonization.

Pointer from Tyler Cowen.

As if there were no incentives anywhere for the private sector to solve this problem. But let me re-frame this from the perspective of an entrepreneur making a pitch to a venture capitalist.

“Doctors and hospitals have a big pain point in that their staff needs to fill out different claim forms for different insurance companies. CutlerMedForms has the solution. We will provide a software application that allows administrative staff to fill out a single, easy-to-understand on-line form. They simply check which insurance payer to whom to submit the bill, and our software fills out that insurance company’s form with the proper insurance codes. We estimate that providers can save $X billion of dollars in administrative costs using our software, making this a large profit opportunity for CutlerMedForms.”

Someone reading this might be skeptical that the profit opportunity actually exists. By the same token,, one should also be skeptical that the “classic public good” really exists.

Affluence and substance abuse

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Random Critical Analysis finds a connection.

The combination of the slowing efficacy of incremental health expenditures (flat of the curve spending) and the rising burden of western illnesses implies a potentially unambiguous negative relationship between income and life expectancy may arise amongst upper-income countries.

Read the whole thing. Case and Deaton describe opioid deaths as American exceptionalism. RCA emphatically disagrees, saying that greater national affluence is associated with greater rates of drug use. That strikes me as not really intuitive, because I am guessing that within a country, the relationship between income and drug use is negative, not positive.

By “western illnesses” he seems to mean lifestyle illnesses, including obesity and substance abuse. One thought that occurs to me is that health among Americans may have been hurt more than helped by the drop in smoking. Other forms of comfort are more harmful, so curbing one form does not help if other forms are substituted.

An American health care scam?

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Described in an EconTalk episode with Russ Roberts and Keith Smith.

So, a $100,000 bill, the hospital collects $13,000. They claim that they lost $87,000.

This $87,000 loss maintains the fiction of their not-for-profit status, but it also provides the basis for a kickback the federal government sends to this hospital in the form of what’s called Disproportionate Share Hospital payments.

So, when you hear uncompensated care, that is the $87,000 that your friend saw written off on the difference between hospital insurance and what insurance paid.

So, the fact is, the hospital made money on that case. But they claimed that they lost $87,000.

And then that fictional loss provides the basis for a kickback from the federal government, called–it’s uncompensated care or DSH, Disproportionate Share Hospital payments.

I would like to know more about the revenue and expense breakdown at hospitals. I am not going to jump on this as a big factor until I see something more definitive.

The problem I have is this: if hospitals are being paid exorbitant amounts per procedure, where is the money going? Bloat? Profits? High salaries? Waste? Cross-subsidies for procedures that are under-charged? I want to see the analysis of the accounting.

Most opioid deaths not from prescriptions

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Jacob Sullum writes,

Although prescription pain medication is commonly blamed for the “opioid epidemic,” such drugs play a small and shrinking role in deaths involving this category of psychoactive substances. A recent study of opioid-related deaths in Massachusetts underlines this crucial point, finding that prescription analgesics were detected without heroin or fentanyl in less than 17 percent of the cases. Furthermore, decedents had prescriptions for the opioids that showed up in toxicology tests just 1.3 percent of the time.

But it’s easier to shake down drug companies than to get at the suppliers of fentanyl. Much, much easier.

On deaths of despair

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Philip N. Cohen writes (pdf download),

This paper uses complete death certificate data from the Mortality Multiple Cause Files with American Community Survey data to examine age-specific mortality rates for married and non-married people from 2007 to 2017. The overall rise in White mortality is limited almost exclusively to those who are not married, for men and women. . . .Analysis by education level shows death rates have risen most for Whites with the lowest education, but have also increased for those with high school or some college.

This is an important finding. I was sent an advance galley of Deaths of Despair, by Anne Case and Angus Deaton, due out in March. I wonder if they will want to revisit the causal narrative that they tell, which strongly emphasizes economic factors, based on the link between (low) education and high mortality rates. Cohen writes,

If White mortality increases are concentrated among people with low levels of education, for whom marriage has become rarer, it’s possible the increased White mortality among single people could reflect the greater share of that group with low education. However, Figure 3 suggests this is not the whole story. . .it appears the overall White marriage mortality ratio is driven both by increasing death rates for everyone at the lowest levels of education, and by increasing marriage disparities at higher levels of education.

Tabarrok and the Baumol effect, reconsidered

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A bunch of folks got together at Cato for lunch to gang up on Alex Tabarrok. Recall that he and Eric Helland want to claim that the high prices of health care and education are almost entirely due to the Baumol Effect.

I offered as an alternative hypothesis that much of the higher prices can be accounted for by the government subsidizing demand and restricting supply. Here are some notes, based on the discussion.

1. Health care spending has been rising at the same rate in most developed countries. Can government policy be the cause everywhere? On the other hand, in most developed countries the proportion of health care spending paid for out of pocket is low, to perhaps there really are not such significant differences in policy across countries.

2. Veterinary care prices have been rising even faster than human health care prices. Yet there are no government subsidies for pet care.

3. Incomes for other high-skill professions, such as accountants and lawyers, also have risen sharply. Point (3) sounds like it could support the Baumol-effect story, but on closer examination it is more problematic.

4. A pure Baumol Effect would raise wages in every occupation where productivity growth is slow, including for barbers and waiters. That has not taken place.

5. It is difficult to account for the vast difference in pay between adjunct professors and tenured professors. At one point, I asked “Are adjuncts idiots?” That is, are their skill levels so dramatically lower than those of tenured professors?

6. Another question to ask is, “Are college administrators idiots?” In theory, it would seem that you could create a university with all courses only taught by adjuncts and offer a low-cost degree. That this does not happen shows how difficult it is to compete in higher education.

Overall, I still suspect that the story of “It’s all a Baumol effect” is an intellectual swindle. It is tautologically true that in a two-good world, if the relative price of good X falls, then the relative price of good Y goes up. But it is not necessarily the case that the price of good Y has to rise relative to *the* wage rate. In fact, the opposite seems more likely. But the actual ata seem to show that prices in health care and education have gone up faster than wages. I have a hard time coming up with a two-good, homogeneous-worker general equilibrium model that can exhibit that behavior.

In fact, when it comes to talking about wages, Tabarrok pulls a switch and starts talking about the wages of high-skilled workers, so we are no longer talking about “the” wage rate. Instead, we are talking about a skill premium. So Tabarrok has already added an epicycle, as it were, to the Baumol Effect story. That is, he has grafted on a skill premium.

I can more easily fit the data to a story that includes a skill premium as well as a Baumol effect. But then one can argue that this skill premium depends in part on regulations that protect credentialed workers. It is amplified by demand subsidies for education and health care, which put government in the role of enhancing the skill premium.

More medical treatment, less health

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In a book review, Chris Pope writes,

Unlike many politicians and pundits, however, Mr. Kaplan doesn’t pretend that the situation is simply the result of overpayment for services that could be easily remedied with mandatory price cuts. He suggests, instead, that America’s high spending is the product of a sicker population, a higher intensity of care and the over-medicalization of care at the end of life. The author is skeptical of the capital-intensive innovations that excite investors, and he observes that R&D spending on drug discovery has seen diminishing returns. “To achieve the kind of scientific progress we enjoyed in the early 1970s,” he writes, “takes 25 times as many researchers today.”

This makes More than Medicine, by Stanford medical professor Robert M. Kaplan, sound like a re-run of my own Crisis of Abundance. There I argued that capital-intensive and skills-intensive medical services with high costs and low benefits are the main driver of the poor performance of our health care system relative to that in other countries.

I also would agree with Kaplan that the really big improvements in health outcomes come from outside of the medical-treatment realm. Think of urban sanitation, reduced pollution, healthier and safer working conditions, and reduced smoking. To me, that argues for taking dollars away from subsidizing demand for medical treatment and trying to apply some those dollars to efforts to improve public health.

But Pope points out that Kaplan writes as if we know how to solve our public-health problems, and we just need the will to do so. My impression is that problems like homelessness and obesity are very challenging, and we will need to sift through many potential solutions. Finding something that works and is widely applicable may not happen for many years, if ever.